Record Foreign Outflows Diverge From Economic Growth
Foreign investors withdrew more than $40 billion from Indian equities during 2025 and 2026, marking one of the most significant disinvestments in the country's financial history. According to data cited by Matthias Knab of Opalesque for New Managers, India trailed the broader emerging markets index by one of the widest margins recorded.
Nishchay Goel of Duro Capital confirmed that 2025 and 2026 were the first back-to-back years of net foreign selling in this century, with 2026 setting a new record for outflows. Between January 2025 and August 31, 2026, approximately $42 billion of foreign portfolio capital left Indian equities.
This sustained selling pressure has fundamentally altered the ownership structure of Indian stocks. Foreigners have net sold Indian equities continuously since 2018, causing foreign ownership to drop to approximately 15%, the lowest level in well over a decade.
Despite the capital flight, India's macroeconomic indicators remained robust during this period. The economy grew above 7% while investment climbed to a record share of GDP. Simultaneously, Indian households invested more money into stocks than foreigners withdrew, creating a divergence between market flows and domestic participation.
Market Underperformance and Index Mechanics
The phase where the Indian economy and stock market diverged began in January 2025 and is described as the most extreme on record. Nishchay Goel noted that since January 1, 2025, India has been one of the weakest equity markets globally, with underperformance against the broader emerging markets index exceeding 70% based on Duro Capital's numbers.
A primary driver of this underperformance was mechanical selling forced by portfolio benchmarks. Nishchay Goel explained that India's weight in the MSCI emerging markets index fell from around 20% to about 11% in two years. This decline occurred because Korea and Taiwan surged as direct beneficiaries of the artificial intelligence buildout, altering the index composition and forcing rebalancing away from Indian assets.
Goel characterized the impact on Indian equities as primarily affecting flows rather than fundamentals. Earnings remained stable, with expectations for the broader market to grow at 17% over the next fiscal year.
Active Managers Identify Structural Entry Points
The dislocation between price and economic reality has attracted attention from active investment managers. Matthew Irwin, Chief Operating Officer of Duro Capital, described India as a structural growth market entering a cyclical upswing following a meaningful reset. He stated that this environment represents the most attractive setup for active managers in five years.
Rajiv Batra, JPMorgan's head of Asia and global emerging markets, identified India as a significant hedge when global markets are trimming or diversifying out of the AI story. This perspective positions Indian equities as an alternative to the technology-heavy sectors driving other emerging market gains.
Recent Inflows Signal Potential Shift
After years of continuous selling, recent data suggests a potential stabilization in foreign capital flows. ShareCafe reported that August brought about $3 billion of foreign institutional inflows into India. This figure marked the largest monthly inflow in nearly two years, indicating a possible reversal in the trend that had defined the previous 24 months.